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Investor Sentiment and Shorted-Stock Return

Author

Listed:
  • Park, Yumi

    (Korea Investment Corporation and Chung-Ang University, South Korea)

  • Suh, Sangwon

    (Chung-Ang University, South Korea)

Abstract

This study examines the role of firm-specific sentiment in the returns on shorted stocks in the Korean stock market. We find evidence that a low or high firm-specific sentiment predicts relatively lower shorted stock returns, whereas a mild sentiment does not. As the sentiment effect on stock returns is stronger in extreme sentiment than mild sentiment, this evidence supports the hypothesis that short sellers are skilled in analyzing firm-specific sentiment. The effect of sentiment on shorted stock returns is pronounced for stocks with a high return volatility, low profitability, high price-to-earnings ratio, high momentum, and a low book-to-market ratio. In contrast, margin traders are not skilled at analyzing firm-specific sentiment, and short sellers possess superior skills compared to margin traders.

Suggested Citation

  • Park, Yumi & Suh, Sangwon, 2023. "Investor Sentiment and Shorted-Stock Return," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 48(4), pages 61-91, December.
    • Handle: RePEc:ris:jecdev:0073
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    More about this item

    Keywords

    Short Selling; Margin Trading; Firm-Specific Investor Sentiment; Korean Stock Market;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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